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July 05, 2004

There are almost 50 banks operating in Bangladesh (about 20 are government owned), out of which 6 or 7 (all private) are running on Islami Banking principles. There is a rising trend of low profile private banks to cash on the public sentiments of the Muslim majority country by opening a few additional branches which is said to be run on Islamic principles. But it has been reported that these banks do not adhere to the proper Islami banking model and is really a mask of traditional banking system. Some of them aim to attract certain investment from Saudi Arabia based IDB (Islami development Bank)who has recently declared a policy to lend money (through Islamic model banks) to the small businesses of the OIC countries.

Now the debate is not on the Islamic banking principles but the way some of the banks are manipulating the Islamic model and act like the traditional model to increase their client base and thus making own profit. Islami Banking is an alternative model of banking and people should know whether the model is exercised by the shrewd bankers according to Islamic law, for which people prefer the model in the first place.

The difference between traditional banking and Islami banking is that it is interest free. Islam prohibits Muslims from taking or giving interest (riba). It has also been argued that riba refers to usury practiced by petty moneylenders and not to interest charged by modern banks and that no riba is involved when interest is imposed on productive loans, however religious people place comfort on an non-interest banking model and that's why Islami banking was evolved in 1971 in Egypt.

The Islamic ban on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production. In Islam, the owner of capital can legitimately share the profits made by the entrepreneur. What makes profit sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined.

Investors in the Islamic order have no right to demand a fixed rate of return. No one is entitled to any addition to the principal sum if he does not share in the risks involved. The owner of capital (rabbul-mal) may 'invest' by allowing an entrepreneur with ideas and expertise to use the capital for productive purposes and he may share the profits, if any, with the entrepreneur borrower (mudarib); losses, if any, however, will be borne wholly by the owner of capital. Another legitimate mode of financing recognized in Islam is one based on equity participation (musharaka); in which the partners use their capital jointly to generate a surplus.

Islamic banks normally operate three broad categories of account, mainly current, savings, and investment accounts. The current account gives no return like traditional banking. The savings account is also operated on an al-wadiah (safe-keeping) basis, but the bank may at its absolute discretion pay the depositors a positive return periodically, depending on its own profitability. The investment account is based on the mudaraba principle as discussed earlier. - Source.

One dissenting view is that the substitution of profit-sharing for interest as a resource allocating mechanism is crude and imperfect and that the institution of interest should therefore be retained as a necessary evil.

That is where my concern is. As far as I know that the newly emerged Islami banks or banks with branches running on Islamic models do not adhere to all of the features stated above. They give loan to people stating a fixed amount of profit and In reality nobody can be sure of the profit before running the project. If the borrower suffers loss, then the bank claims back their share of profit along with the capital just like traditional banking. In fact they are just masking the traditional interest based model in the name of Islam. In savings account they are also promising a high rate of return and in some cases they are being pre-fixed. It has also been reported that some banks suppress their actual profit so that the savings account holders will not get a larger share of the profit. These Islami banks sometimes borrow capital from Bangladesh Bank on traditional interest.

So more awareness is required from the common people who will put their trust in a bank. There is nothing wrong with the Islami Banking model atleast in theory. However malpractice can deceive people's beliefs. And in a country with low literacy rate that is more likely to happen.